This page intentionally left blank
|
|
- Lorena Sharp
- 7 years ago
- Views:
Transcription
1
2 This page intentionally left blank
3 Trading Strategies Involving Options 239 Table 11.1 ST^K^ K\ < ST < K-2 S T ^ K 2 a bull spread created using calls. long call option &T ^ 1 &T ^ 1 short call option (OT A.2J payoff ST-KI The most aggressive bull spreads are those of type 1. They cost very little to set up and have a small probability of giving a relatively high payoff (= K 2 K]). As we move from type 1 to type 2 and from type 2 to type 3, the spreads become more conservative. Example 11.2 An investor buys for $3 a 3-month European call with a strike price of $3 and sells for $1 a 3-month European call with a strike price of $35. The payoff from this bull spread strategy is $5 if the stock price is above $35, and zero if it is below $3. If the stock price is between $3 and $35, the payoff is the amount by which the stock price exceeds $3. The cost of the strategy is $3 $1 = $2. So the profit is: S T <3 3 < S T < 35 Sr> 35 Profit -2 S T Bull spreads can also be created by buying a European put with a low strike price and selling a European put with a high strike price, as illustrated in Figure Unlike bull spreads created from calls, those created from puts involve a positive up-front cash flow to the investor (ignoring margin requirements) and a payoff that is either negative or zero. Figure 11.3 Profit from bull spread created using put options.
4 24 CHAPTER 11 Bear Spreads An investor who enters into a bull spread is hoping that the stock price will increase. By contrast, an investor who enters into a bear spread is hoping that the stock price will decline. Bear spreads can be created by buying a European put with one strike price and selling a European put with another strike price. The strike price of the option purchased is greater than the strike price of the option sold. (This is in contrast to a bull spread, where the strike price of the option purchased is always less than the strike price of the option sold.) In Figure 11.4, the profit from the spread is shown by the solid line. A bear spread created from puts involves an initial cash outflow because the price of the put sold is less than the price of the put purchased. In essence, the investor has bought a put with a certain strike price and chosen to give up some of the profit potential by selling a put with a lower strike price. In return for the profit given up, the investor gets the price of the option sold. Assume that the strike prices are KI and K 2, with KI < K 2. Table 11.2 shows the payoff that will be realized from a bear spread in different circumstances. If the stock price is greater than K 2, the payoff is zero. If the stock price is less than KI, the payoff is K 2 KI. If the stock price is between KI and K 2, the payoff is K 2 S T. The profit is calculated by subtracting the initial cost from the payoff. Example 11.3 An investor buys for $3 a 3-month European put with a strike price of $35 and sells for $1 a 3-month European put with a strike price of $3. The payoff from this bear spread strategy is zero if the stock price is above $35, and $5 if it is below $3. If the stock price is between $3 and $35, the payoff is 35 ST- The options cost $3 - $1 = $2 up front. So the profit is: Sr< 3 3 < S T < 35 st> 35 Profit S T -2 Figure 11.4 Profit from bear spread created using put options.
5 Trading Strategies Involving Options 241 Table 11.2 ST^K^ K\ < ST < K-2 S T ^ K 2 a bear spread created with put options. long put option short put option -(Ki - S T ) payoff Like bull spreads, bear spreads limit both the upside profit potential and the downside risk. Bear spreads can be created using calls instead of puts. The investor buys a call with a high strike price and sells a call with a low strike price, as illustrated in Figure Bear spreads created with calls involve an initial cash inflow (ignoring margin requirements). Box Spreads A box spread is a combination of a bull call spread with strike prices K] and K 2 and a bear put spread with the same two strike prices. As shown in Table 11.3, the payoff from a box spread is always K 2 K]. The value of a box spread is therefore always the present value of this payoff or (K 2 K])e~ rt. If it has a different value there is an arbitrage opportunity. If the market price of the box spread is too low, it is profitable to buy the box. This involves buying a call with strike price K\, buying a put with strike price K 2, selling a call with strike price K 2, and selling a put with strike price K\. If the market price of the box spread is too high, it is profitable to sell the box. This involves buying a call with strike price K 2, buying a put with strike price K\, selling a call with strike price K\, and selling a put with strike price K 2. It is important to realize that a box-spread arbitrage only works with European options. Many of the options that trade on exchanges are American. As shown in Business Snapshot 11.1, inexperienced traders who treat American options as European are liable to lose money. Figure 11.5 Profit from bear spread created using call options.
6 242 CHAPTER 11 Table 11.3 S T^K, KI < S T < K 2 S T ^ K 2 a box spread. bull call spread Sr-Ki bear put spread payoff Butterfly Spreads A butterfly spread involves positions in options with three different strike prices. It can be created by buying a European call option with a relatively low strike price KI, buying a European call option with a relatively high strike price K 3, and selling two European call options with a strike price K 2 that is halfway between K\ and K 3. Generally, K 2 is close to the current stock price. The pattern of profits from the strategy is shown in Figure A butterfly spread leads to a profit if the stock price stays close to K 2, but gives rise to a small loss if there is a significant stock price move in either direction. It is therefore an appropriate strategy for an investor who feels that large stock price moves are unlikely. The strategy requires a small investment initially. The payoff from a butterfly spread is shown in Table Suppose that a certain stock is currently worth $61. Consider an investor who feels that a significant price move in the next 6 months is unlikely. Suppose that the market prices of 6-month European calls are as follows: Strike price ($ ) Call price ($) Figure 11.6 Profit from butterfly spread using call options.
7 Trading Strategies Involving Options 243 Table 11.4 ST^K^ K\ < ST ^ K 2 K 2 < S T < KI ST^ K 3 a butterfly spread. first long call C E^ JT AI C t JT AI 7 C t 7 Oy A] second long call short calls -2(5 r - K 2 ) S T - K 3-2(S T - K 2 ) * These payoffs are calculated using the relationship K^ =.5(K\ + KI). payoff* ST-KI KJ-ST The investor could create a butterfly spread by buying one call with a $55 strike price, buying one call with a $65 strike price, and selling two calls with a $6 strike price. It costs $1 + $5 (2 x $7) = $1 to create the spread. If the stock price in 6 months is greater than $65 or less than $55, the total payoff is zero, and the investor incurs a net loss of $1. If the stock price is between $56 and $64, a profit is made. The maximum profit, $4, occurs when the stock price in 6 months is $6. Butterfly spreads can be created using put options. The investor buys two European puts, one with a low strike price and one with a high strike price, and sells two European puts with an intermediate strike price, as illustrated in Figure The butterfly spread in the example considered above would be created by buying one put with a strike price of $55, another with a strike price of $65, and selling two puts with a strike price of $6. The use of put options results in exactly the same spread as the use of call options. Put-call parity can be used to show that the initial investment is the same in both cases. A butterfly spread can be sold or shorted by following the reverse strategy. Options are sold with strike prices of KI and A" 3, and two options with the middle strike price K 2 are purchased. This strategy produces a modest profit if there is a significant movement in the stock price. Figure 11.7 Profit from butterfly spread using put options.
CHAPTER 8: TRADING STRATEGES INVOLVING OPTIONS
CHAPTER 8: TRADING STRATEGES INVOLVING OPTIONS Unless otherwise stated the options we consider are all European. Toward the end of this chapter, we will argue that if European options were available with
More informationFactors Affecting Option Prices
Factors Affecting Option Prices 1. The current stock price S 0. 2. The option strike price K. 3. The time to expiration T. 4. The volatility of the stock price σ. 5. The risk-free interest rate r. 6. The
More informationTrading Strategies Involving Options. Chapter 11
Trading Strategies Involving Options Chapter 11 1 Strategies to be Considered A risk-free bond and an option to create a principal-protected note A stock and an option Two or more options of the same type
More informationLecture 12. Options Strategies
Lecture 12. Options Strategies Introduction to Options Strategies Options, Futures, Derivatives 10/15/07 back to start 1 Solutions Problem 6:23: Assume that a bank can borrow or lend money at the same
More informationArbitrage spreads. Arbitrage spreads refer to standard option strategies like vanilla spreads to
Arbitrage spreads Arbitrage spreads refer to standard option strategies like vanilla spreads to lock up some arbitrage in case of mispricing of options. Although arbitrage used to exist in the early days
More information9 Basics of options, including trading strategies
ECG590I Asset Pricing. Lecture 9: Basics of options, including trading strategies 1 9 Basics of options, including trading strategies Option: The option of buying (call) or selling (put) an asset. European
More informationFinance 436 Futures and Options Review Notes for Final Exam. Chapter 9
Finance 436 Futures and Options Review Notes for Final Exam Chapter 9 1. Options: call options vs. put options, American options vs. European options 2. Characteristics: option premium, option type, underlying
More informationSession X: Lecturer: Dr. Jose Olmo. Module: Economics of Financial Markets. MSc. Financial Economics. Department of Economics, City University, London
Session X: Options: Hedging, Insurance and Trading Strategies Lecturer: Dr. Jose Olmo Module: Economics of Financial Markets MSc. Financial Economics Department of Economics, City University, London Option
More informationCHAPTER 20: OPTIONS MARKETS: INTRODUCTION
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION 1. Cost Profit Call option, X = 95 12.20 10 2.20 Put option, X = 95 1.65 0 1.65 Call option, X = 105 4.70 0 4.70 Put option, X = 105 4.40 0 4.40 Call option, X
More information1 Directional Trading Strategies
Brunel University Msc., EC5504, Financial Engineering Prof Menelaos Karanasos Lecture Notes: Directional Trading Strategies 1 Directional Trading Strategies With options you can pro t from correctly predicting
More informationLecture 6: Portfolios with Stock Options Steven Skiena. http://www.cs.sunysb.edu/ skiena
Lecture 6: Portfolios with Stock Options Steven Skiena Department of Computer Science State University of New York Stony Brook, NY 11794 4400 http://www.cs.sunysb.edu/ skiena Portfolios with Options The
More informationFigure S9.1 Profit from long position in Problem 9.9
Problem 9.9 Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances
More informationGuide to Options Strategies
RECOGNIA S Guide to Options Strategies A breakdown of key options strategies to help you better understand the characteristics and implications of each Recognia s Guide to Options Strategies 1 3 Buying
More informationCHAPTER 20 Understanding Options
CHAPTER 20 Understanding Options Answers to Practice Questions 1. a. The put places a floor on value of investment, i.e., less risky than buying stock. The risk reduction comes at the cost of the option
More informationLecture 7: Bounds on Options Prices Steven Skiena. http://www.cs.sunysb.edu/ skiena
Lecture 7: Bounds on Options Prices Steven Skiena Department of Computer Science State University of New York Stony Brook, NY 11794 4400 http://www.cs.sunysb.edu/ skiena Option Price Quotes Reading the
More information2. How is a fund manager motivated to behave with this type of renumeration package?
MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff
More informationOptions Markets: Introduction
Options Markets: Introduction Chapter 20 Option Contracts call option = contract that gives the holder the right to purchase an asset at a specified price, on or before a certain date put option = contract
More informationExample 1. Consider the following two portfolios: 2. Buy one c(s(t), 20, τ, r) and sell one c(s(t), 10, τ, r).
Chapter 4 Put-Call Parity 1 Bull and Bear Financial analysts use words such as bull and bear to describe the trend in stock markets. Generally speaking, a bull market is characterized by rising prices.
More informationLecture 5: Put - Call Parity
Lecture 5: Put - Call Parity Reading: J.C.Hull, Chapter 9 Reminder: basic assumptions 1. There are no arbitrage opportunities, i.e. no party can get a riskless profit. 2. Borrowing and lending are possible
More information11 Option. Payoffs and Option Strategies. Answers to Questions and Problems
11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various
More informationLecture 3: Put Options and Distribution-Free Results
OPTIONS and FUTURES Lecture 3: Put Options and Distribution-Free Results Philip H. Dybvig Washington University in Saint Louis put options binomial valuation what are distribution-free results? option
More informationHedging Strategies Using
Chapter 4 Hedging Strategies Using Futures and Options 4.1 Basic Strategies Using Futures While the use of short and long hedges can reduce (or eliminate in some cases - as below) both downside and upside
More informationChapter 21: Options and Corporate Finance
Chapter 21: Options and Corporate Finance 21.1 a. An option is a contract which gives its owner the right to buy or sell an underlying asset at a fixed price on or before a given date. b. Exercise is the
More informationOptions Pricing. This is sometimes referred to as the intrinsic value of the option.
Options Pricing We will use the example of a call option in discussing the pricing issue. Later, we will turn our attention to the Put-Call Parity Relationship. I. Preliminary Material Recall the payoff
More informationOptions. Moty Katzman. September 19, 2014
Options Moty Katzman September 19, 2014 What are options? Options are contracts conferring certain rights regarding the buying or selling of assets. A European call option gives the owner the right to
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support
More informationChapter 5 Financial Forwards and Futures
Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment
More information2. Exercising the option - buying or selling asset by using option. 3. Strike (or exercise) price - price at which asset may be bought or sold
Chapter 21 : Options-1 CHAPTER 21. OPTIONS Contents I. INTRODUCTION BASIC TERMS II. VALUATION OF OPTIONS A. Minimum Values of Options B. Maximum Values of Options C. Determinants of Call Value D. Black-Scholes
More informationFIN-40008 FINANCIAL INSTRUMENTS SPRING 2008. Options
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes describe the payoffs to European and American put and call options the so-called plain vanilla options. We consider the payoffs to these
More informationK 1 < K 2 = P (K 1 ) P (K 2 ) (6) This holds for both American and European Options.
Slope and Convexity Restrictions and How to implement Arbitrage Opportunities 1 These notes will show how to implement arbitrage opportunities when either the slope or the convexity restriction is violated.
More informationStrategies in Options Trading By: Sarah Karfunkel
Strategies in Options Trading By: Sarah Karfunkel Covered Call Writing: I nvestors use two strategies involving stock options to offset risk: (1) covered call writing and (2) protective puts. The strategy
More informationCHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS
INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS. On April, the spot price of the British pound was $.86 and the price of the June futures
More informationFIN-40008 FINANCIAL INSTRUMENTS SPRING 2008
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes consider the way put and call options and the underlying can be combined to create hedges, spreads and combinations. We will consider the
More informationCopyright 2009 by National Stock Exchange of India Ltd. (NSE) Exchange Plaza, Bandra Kurla Complex, Bandra (East), Mumbai 400 051 INDIA
Copyright 2009 by National Stock Exchange of India Ltd. (NSE) Exchange Plaza, Bandra Kurla Complex, Bandra (East), Mumbai 400 051 INDIA All content included in this book, such as text, graphics, logos,
More informationFin 3710 Investment Analysis Professor Rui Yao CHAPTER 14: OPTIONS MARKETS
HW 6 Fin 3710 Investment Analysis Professor Rui Yao CHAPTER 14: OPTIONS MARKETS 4. Cost Payoff Profit Call option, X = 85 3.82 5.00 +1.18 Put option, X = 85 0.15 0.00-0.15 Call option, X = 90 0.40 0.00-0.40
More informationChapter 5 Option Strategies
Chapter 5 Option Strategies Chapter 4 was concerned with the basic terminology and properties of options. This chapter discusses categorizing and analyzing investment positions constructed by meshing puts
More informationHedging. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan Hedging
Hedging An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2010 Introduction Definition Hedging is the practice of making a portfolio of investments less sensitive to changes in
More informationCHAPTER 20: OPTIONS MARKETS: INTRODUCTION
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,
More informationDerivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs.
OPTIONS THEORY Introduction The Financial Manager must be knowledgeable about derivatives in order to manage the price risk inherent in financial transactions. Price risk refers to the possibility of loss
More informationChapter 20 Understanding Options
Chapter 20 Understanding Options Multiple Choice Questions 1. Firms regularly use the following to reduce risk: (I) Currency options (II) Interest-rate options (III) Commodity options D) I, II, and III
More informationIntroduction to Options
Introduction to Options By: Peter Findley and Sreesha Vaman Investment Analysis Group What Is An Option? One contract is the right to buy or sell 100 shares The price of the option depends on the price
More informationBasics of Spreading: Butterflies and Condors
1 of 31 Basics of Spreading: Butterflies and Condors What is a Spread? Review the links below for detailed information. Terms and Characterizations: Part 1 Download What is a Spread? Download: Butterflies
More informationFX, Derivatives and DCM workshop I. Introduction to Options
Introduction to Options What is a Currency Option Contract? A financial agreement giving the buyer the right (but not the obligation) to buy/sell a specified amount of currency at a specified rate on a
More informationAmerican Options. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan American Options
American Options An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2010 Early Exercise Since American style options give the holder the same rights as European style options plus
More informationINTRODUCTION TO OPTIONS MARKETS QUESTIONS
INTRODUCTION TO OPTIONS MARKETS QUESTIONS 1. What is the difference between a put option and a call option? 2. What is the difference between an American option and a European option? 3. Why does an option
More informationUse the option quote information shown below to answer the following questions. The underlying stock is currently selling for $83.
Problems on the Basics of Options used in Finance 2. Understanding Option Quotes Use the option quote information shown below to answer the following questions. The underlying stock is currently selling
More informationOPTION TRADING STRATEGIES IN INDIAN STOCK MARKET
OPTION TRADING STRATEGIES IN INDIAN STOCK MARKET Dr. Rashmi Rathi Assistant Professor Onkarmal Somani College of Commerce, Jodhpur ABSTRACT Options are important derivative securities trading all over
More informationHow to Trade Options: Strategy Building Blocks
How to Trade Options: Strategy Building Blocks MICHAEL BURKE Important Information and Disclosures This course is provided by TradeStation, a U.S.-based multi-asset brokerage company that seeks to serve
More informationEXERCISES FROM HULL S BOOK
EXERCISES FROM HULL S BOOK 1. Three put options on a stock have the same expiration date, and strike prices of $55, $60, and $65. The market price are $3, $5, and $8, respectively. Explain how a butter
More informationQuestions and Answers
MA3245 Financial Mathematics I Suggested Solutions of Tutorial 1 (Semester 2/03-04) Questions and Answers 1. What is the difference between entering into a long forward contract when the forward price
More informationCaput Derivatives: October 30, 2003
Caput Derivatives: October 30, 2003 Exam + Answers Total time: 2 hours and 30 minutes. Note 1: You are allowed to use books, course notes, and a calculator. Question 1. [20 points] Consider an investor
More informationHedging Using Forward Contracts
10 CHAPTER 1 Business Snapshot1.1 Hedge Funds Hedge funds have become major users of derivatives for hedging, speculation, and arbitrage. A hedge fund is similar to a mutual fund in that it invests funds
More informationLecture 4: Properties of stock options
Lecture 4: Properties of stock options Reading: J.C.Hull, Chapter 9 An European call option is an agreement between two parties giving the holder the right to buy a certain asset (e.g. one stock unit)
More informationTHE EQUITY OPTIONS STRATEGY GUIDE
THE EQUITY OPTIONS STRATEGY GUIDE APRIL 2003 Table of Contents Introduction 2 Option Terms and Concepts 4 What is an Option? 4 Long 4 Short 4 Open 4 Close 5 Leverage and Risk 5 In-the-money, At-the-money,
More informationBuying Call or Long Call. Unlimited Profit Potential
Options Basis 1 An Investor can use options to achieve a number of different things depending on the strategy the investor employs. Novice option traders will be allowed to buy calls and puts, to anticipate
More informationhttp://www.infinity100.com
http://www.infinity100.com THE GREEKS MANAGING AND PROFITING FROM DELTA, VEGA, THETA, GAMMA RISK THE 'GREEKS' RISK MANGEMENT GRID Line Max Profit? * VEGA POSITION 1 Long Vega 2 3, 4 Short Vega Long Vega
More informationb. June expiration: 95-23 = 95 + 23/32 % = 95.71875% or.9571875.9571875 X $100,000 = $95,718.75.
ANSWERS FOR FINANCIAL RISK MANAGEMENT A. 2-4 Value of T-bond Futures Contracts a. March expiration: The settle price is stated as a percentage of the face value of the bond with the final "27" being read
More informationUsage of Option Contracts for Foreign Exchange Risk Management
Usage of Option Contracts for Foreign Exchange Risk Management Daniel Armeanu Ph.D. Lecturer Florentina-Olivia Bãlu Candidate Ph.D. Assistant Academy of Economic Studies, Bucharest Abstract. Today in Romania,
More informationUnderlying (S) The asset, which the option buyer has the right to buy or sell. Notation: S or S t = S(t)
INTRODUCTION TO OPTIONS Readings: Hull, Chapters 8, 9, and 10 Part I. Options Basics Options Lexicon Options Payoffs (Payoff diagrams) Calls and Puts as two halves of a forward contract: the Put-Call-Forward
More informationFTS Real Time Client: Equity Portfolio Rebalancer
FTS Real Time Client: Equity Portfolio Rebalancer Many portfolio management exercises require rebalancing. Examples include Portfolio diversification and asset allocation Indexation Trading strategies
More informationCall and Put. Options. American and European Options. Option Terminology. Payoffs of European Options. Different Types of Options
Call and Put Options A call option gives its holder the right to purchase an asset for a specified price, called the strike price, on or before some specified expiration date. A put option gives its holder
More informationHow to Collect a 162% Cash on Cash Return
How to Collect a 162% Cash on Cash Return Today we are going to explore one of the most profitable, low-risk income strategies I ve come across in my 27 years of trading. This income strategy produced
More informationPart A: The put call parity relation is: call + present value of exercise price = put + stock price.
Corporate Finance Mod 20: Options, put call parity relation, Practice Problem s ** Exercise 20.1: Put Call Parity Relation! One year European put and call options trade on a stock with strike prices of
More informationName Graph Description Payoff Profit Comments. commodity at some point in the future at a prespecified. commodity at some point
Name Graph Description Payoff Profit Comments Long Commitment to purchase commodity at some point in the future at a prespecified price S T - F S T F No premium Asset price contingency: Always Maximum
More informationOne Period Binomial Model
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 One Period Binomial Model These notes consider the one period binomial model to exactly price an option. We will consider three different methods of pricing
More informationConvenient Conventions
C: call value. P : put value. X: strike price. S: stock price. D: dividend. Convenient Conventions c 2015 Prof. Yuh-Dauh Lyuu, National Taiwan University Page 168 Payoff, Mathematically Speaking The payoff
More informationFundamentals of Futures and Options (a summary)
Fundamentals of Futures and Options (a summary) Roger G. Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA Published 2013 by the Research Foundation of CFA Institute Summary prepared by Roger G.
More informationOptions Strategies. 26 proven options strategies
asx 267_cover 25/8/9 1:32 PM Page 2 Options Strategies 26 proven options strategies Information line: 131 279 www.asx.com.au HOW TO USE THIS BOOKLET This brochure details more than two dozen strategies
More informationAnswers to Concepts in Review
Answers to Concepts in Review 1. Puts and calls are negotiable options issued in bearer form that allow the holder to sell (put) or buy (call) a stipulated amount of a specific security/financial asset,
More informationOption Properties. Liuren Wu. Zicklin School of Business, Baruch College. Options Markets. (Hull chapter: 9)
Option Properties Liuren Wu Zicklin School of Business, Baruch College Options Markets (Hull chapter: 9) Liuren Wu (Baruch) Option Properties Options Markets 1 / 17 Notation c: European call option price.
More informationSetting the scene. by Stephen McCabe, Commonwealth Bank of Australia
Establishing risk and reward within FX hedging strategies by Stephen McCabe, Commonwealth Bank of Australia Almost all Australian corporate entities have exposure to Foreign Exchange (FX) markets. Typically
More informationOptions. + Concepts and Buzzwords. Readings. Put-Call Parity Volatility Effects
+ Options + Concepts and Buzzwords Put-Call Parity Volatility Effects Call, put, European, American, underlying asset, strike price, expiration date Readings Tuckman, Chapter 19 Veronesi, Chapter 6 Options
More informationMargin Requirements & Margin Calls
Margin Requirements & Margin Calls Dr. Patrick Toche References : Zvi Bodie, Alex Kane, Alan J. Marcus. Essentials of Investment. McGraw- Hill Irwin. Chapter 3 of the Bodie-Kane-Marcus textbook will be
More informationhp calculators HP 17bII+ Net Present Value and Internal Rate of Return Cash Flow Zero A Series of Cash Flows What Net Present Value Is
HP 17bII+ Net Present Value and Internal Rate of Return Cash Flow Zero A Series of Cash Flows What Net Present Value Is Present Value and Net Present Value Getting the Present Value And Now For the Internal
More informationFUNDING INVESTMENTS FINANCE 238/738, Spring 2008, Prof. Musto Class 6 Introduction to Corporate Bonds
FUNDING INVESTMENTS FINANCE 238/738, Spring 2008, Prof. Musto Class 6 Introduction to Corporate Bonds Today: I. Equity is a call on firm value II. Senior Debt III. Junior Debt IV. Convertible Debt V. Variance
More informationUniversity of Texas at Austin. HW Assignment 7. Butterfly spreads. Convexity. Collars. Ratio spreads.
HW: 7 Course: M339D/M389D - Intro to Financial Math Page: 1 of 5 University of Texas at Austin HW Assignment 7 Butterfly spreads. Convexity. Collars. Ratio spreads. 7.1. Butterfly spreads and convexity.
More informationADVANCED COTTON FUTURES AND OPTIONS STRATEGIES
ADVANCED COTTON FUTURES AND OPTIONS STRATEGIES Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System INTRODUCTION Cotton producers have used futures
More informationMargin Requirements & Margin Calls
Margin Requirements & Margin Calls Dr. Patrick Toche References : Zvi Bodie, Alex Kane, Alan J. Marcus. Essentials of Investment. McGraw- Hill Irwin. Chapter 3 of the Bodie-Kane-Marcus textbook will be
More informationINVESTMENT OBJECTIVE TTM U.S. CORE ETF DETAILS HIGHLIGHTS
Our uncertain global economy presents a new paradigm for investing. Protecting the wealth you have accumulated is as important as growth. 1/31/2015 Markets move in recognizable trends and countertrends.
More informationExpected payoff = 1 2 0 + 1 20 = 10.
Chapter 2 Options 1 European Call Options To consolidate our concept on European call options, let us consider how one can calculate the price of an option under very simple assumptions. Recall that the
More informationOption Values. Option Valuation. Call Option Value before Expiration. Determinants of Call Option Values
Option Values Option Valuation Intrinsic value profit that could be made if the option was immediately exercised Call: stock price exercise price : S T X i i k i X S Put: exercise price stock price : X
More informationSection 1. Introduction to Option Trading
Section 1. Introduction to Option Trading Trading stock options is a much different game from trading the underlying stocks. When options are traded for appreciation, it is a game of leverage, with big
More informationChapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO END-OF-CHAPTER QUESTIONS
Chapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO END-OF-CHAPTER QUESTIONS 8-1 a. An option is a contract which gives its holder the right to buy or sell an asset at some predetermined
More informationDERIVATIVE INSTRUMENTS RISK STATEMENT FORM (applicable to transactions at Turkish Derivatives Exchange)
DERIVATIVE INSTRUMENTS RISK STATEMENT FORM (applicable to transactions at Turkish Derivatives Exchange) Important Explanation: While you may generate revenues as a result of the purchase-sale transactions
More informationChapter 21 Valuing Options
Chapter 21 Valuing Options Multiple Choice Questions 1. Relative to the underlying stock, a call option always has: A) A higher beta and a higher standard deviation of return B) A lower beta and a higher
More information1 Volatility Trading Strategies
Brunel University Msc., EC5504, Financial Engineering Prof Menelaos Karanasos Lecture Notes: Volatility Trading Strategies 1 Volatility Trading Strategies As previously explained, volatility is essentially
More informationSection 1 - Overview and Option Basics
1 of 10 Section 1 - Overview and Option Basics Download this in PDF format. Welcome to the world of investing and trading with options. The purpose of this course is to show you what options are, how they
More informationName: 1 (5) a b c d e TRUE/FALSE 1 (2) TRUE FALSE. 2 (5) a b c d e. 3 (5) a b c d e 2 (2) TRUE FALSE. 4 (5) a b c d e.
Name: Thursday, February 28 th M375T=M396C Introduction to Actuarial Financial Mathematics Spring 2013, The University of Texas at Austin In-Term Exam I Instructor: Milica Čudina Notes: This is a closed
More informationTHE POWER OF FOREX OPTIONS
THE POWER OF FOREX OPTIONS TOPICS COVERED Option basics Call options Put Options Why trade options? Covered call Covered put Hedging your position using options How to repair a trading position THE POWER
More informationEC372 Bond and Derivatives Markets Topic #5: Options Markets I: fundamentals
EC372 Bond and Derivatives Markets Topic #5: Options Markets I: fundamentals R. E. Bailey Department of Economics University of Essex Outline Contents 1 Call options and put options 1 2 Payoffs on options
More informationOption pricing. Vinod Kothari
Option pricing Vinod Kothari Notation we use this Chapter will be as follows: S o : Price of the share at time 0 S T : Price of the share at time T T : time to maturity of the option r : risk free rate
More informationAdvanced Strategies for Managing Volatility
Advanced Strategies for Managing Volatility Description: Investment portfolios are generally exposed to volatility through company-specific risk and through market risk. Long-term investors can reduce
More informationHow To Buy Stock On Margin
LESSON 8 BUYING ON MARGIN AND SELLING SHORT ACTIVITY 8.1 A MARGINAL PLAY Stockbroker Luke, Katie, and Jeremy are sitting around a desk near a sign labeled Brokerage Office. The Moderator is standing in
More informationECMC49F Options Practice Questions Suggested Solution Date: Nov 14, 2005
ECMC49F Options Practice Questions Suggested Solution Date: Nov 14, 2005 Options: General [1] Define the following terms associated with options: a. Option An option is a contract which gives the holder
More informationCHAPTER 14. Stock Options
CHAPTER 14 Stock Options Options have fascinated investors for centuries. The option concept is simple. Instead of buying stock shares today, you buy an option to buy the stock at a later date at a price
More informationDefinition. Market. Volatility levels allocated by the Issuer. Volatility Levels allocated by JSE
Warrants Definition A warrant is a geared financial instrument which gives the warrant holder the right but not the obligation to buy, sell or participate in the performance of the underlying security,
More informationBefore we discuss a Call Option in detail we give some Option Terminology:
Call and Put Options As you possibly have learned, the holder of a forward contract is obliged to trade at maturity. Unless the position is closed before maturity the holder must take possession of the
More informationOptions: Definitions, Payoffs, & Replications
Options: Definitions, s, & Replications Liuren Wu Zicklin School of Business, Baruch College Options Markets Liuren Wu (Baruch) s Options Markets 1 / 34 Definitions and terminologies An option gives the
More informationSOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Financial Economics
SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Financial Economics June 2014 changes Questions 1-30 are from the prior version of this document. They have been edited to conform
More information